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Income Taxes | 12 Months Ended
--- | ---
May. 31, 2015
Income Tax Disclosure [Abstract] |
Income Taxes |
NOTE 9 — Income Taxes
Income before income taxes is as follows:
|  | Year Ended May 31,
(In millions) |  | 2015 |  | 2014 |  | 2013
Income before income taxes: |  |  |  |  |  |
United States |  | $ | 1,967 |  |  | $ | 3,066 |  |  | $ | 1,231 |
Foreign |  | 2,238 |  |  | 478 |  |  | 2,025 |
TOTAL INCOME BEFORE INCOME TAXES |  | $ | 4,205 |  |  | $ | 3,544 |  |  | $ | 3,256 |
The provision for income taxes is as follows:
|  | Year Ended May 31,
(In millions) |  | 2015 |  | 2014 |  | 2013
Current: |  |  |  |  |  |
United States |  |  |  |  |  |
Federal |  | $ | 596 |  |  | $ | 259 |  |  | $ | 378 |
State |  | 80 |  |  | 104 |  |  | 79 |
Foreign |  | 369 |  |  | 499 |  |  | 442 |
Total |  | 1,045 |  |  | 862 |  |  | 899 |
Deferred: |  |  |  |  |  |
United States |  |  |  |  |  |
Federal |  | (66 | ) |  | 19 |  |  | (4 | )
State |  | (11 | ) |  | (3 | ) |  | (4 | )
Foreign |  | (36 | ) |  | (27 | ) |  | (86 | )
Total |  | (113 | ) |  | (11 | ) |  | (94 | )
TOTAL INCOME TAX EXPENSE |  | $ | 932 |  |  | $ | 851 |  |  | $ | 805 |
A reconciliation from the U.S. statutory federal income tax rate to the effective income tax rate is as follows:
|  | Year Ended May 31,
|  | 2015 |  | 2014 |  | 2013
Federal income tax rate |  | 35.0 | % |  | 35.0 | % |  | 35.0 | %
State taxes, net of federal benefit |  | 0.9 | % |  | 1.8 | % |  | 1.4 | %
Foreign earnings |  | -15.7 | % |  | 2.2 | % |  | -11.8 | %
Deferred charge |  | 0.9 | % |  | -14.6 | % |  | 0.0 | %
Other, net |  | 1.1 | % |  | -0.4 | % |  | 0.1 | %
EFFECTIVE INCOME TAX RATE |  | 22.2 | % |  | 24.0 | % |  | 24.7 | %
The effective tax rate from continuing operations for the year ended May 31, 2015 was 180 basis points lower than the effective tax rate from continuing operations for the year ended May 31, 2014 primarily due to the favorable resolution of audits in several jurisdictions. The effective tax rate from continuing operations for the year ended May 31, 2014 was 70 basis points lower than the effective tax rate from continuing operations for the year ended May 31, 2013 primarily due to an increase in the amount of earnings from lower tax rate jurisdictions. During the fourth quarter of the fiscal year ended May 31, 2014, the Company reached a resolution with the IRS on a U.S. Unilateral Advanced Pricing Agreement that covers intercompany transfer pricing for fiscal years 2011 through 2020. This agreement resulted in an increase in the effective tax rate due to a reduction in the Company’s permanently reinvested foreign earnings, which was partially offset by a reduction in previously unrecognized tax benefits. It also resulted in a decrease in the effective tax rate due to the recognition of a deferred tax charge. The net result of the agreement did not have a material impact on the Company’s effective income tax rate in fiscal 2014. Deferred tax assets and (liabilities) comprise the following:
|  | As of May 31,
(In millions) |  | 2015 |  | 2014
Deferred tax assets: |  |  |  |
Allowance for doubtful accounts |  | $ | 11 |  |  | $ | 11 |
Inventories |  | 59 |  |  | 49 |
Sales return reserves |  | 143 |  |  | 113 |
Deferred compensation |  | 258 |  |  | 211 |
Stock-based compensation |  | 179 |  |  | 162 |
Reserves and accrued liabilities |  | 92 |  |  | 95 |
Net operating loss carry-forwards |  | 10 |  |  | 16 |
Undistributed earnings of foreign subsidiaries |  | 149 |  |  | 194 |
Other |  | 76 |  |  | 51 |
Total deferred tax assets |  | 977 |  |  | 902 |
Valuation allowance |  | (9 | ) |  | (9 | )
Total deferred tax assets after valuation allowance |  | 968 |  |  | 893 |
Deferred tax liabilities: |  |  |  |
Property, plant and equipment |  | (220 | ) |  | (237 | )
Intangibles |  | (93 | ) |  | (94 | )
Other |  | (38 | ) |  | (2 | )
Total deferred tax liability |  | (351 | ) |  | (333 | )
NET DEFERRED TAX ASSET |  | $ | 617 |  |  | $ | 560 |
The following is a reconciliation of the changes in the gross balance of unrecognized tax benefits:
|  | As of May 31,
(In millions) |  | 2015 |  | 2014 |  | 2013
Unrecognized tax benefits, beginning of the period |  | $ | 506 |  |  | $ | 447 |  |  | $ | 285 |
Gross increases related to prior period tax positions(1) |  | 32 |  |  | 814 |  |  | 77 |
Gross decreases related to prior period tax positions(1) |  | (123 | ) |  | (166 | ) |  | (3 | )
Gross increases related to current period tax positions |  | 82 |  |  | 125 |  |  | 130 |
Gross decreases related to current period tax positions |  | (9 | ) |  | (30 | ) |  | (9 | )
Settlements(1) |  | (27 | ) |  | (676 | ) |  | — |
Lapse of statute of limitations |  | (10 | ) |  | (4 | ) |  | (21 | )
Changes due to currency translation |  | (13 | ) |  | (4 | ) |  | (12 | )
UNRECOGNIZED TAX BENEFITS, END OF THE PERIOD |  | $ | 438 |  |  | $ | 506 |  |  | $ | 447 |
(1) | During the fourth quarter of the fiscal year ended May 31, 2014, the Company reached a resolution with the IRS on a U.S. Unilateral Advanced Pricing Agreement that covers intercompany transfer pricing for fiscal years 2011 through 2020. As a result, the Company recorded a gross increase in unrecognized tax benefits related to prior period tax positions, a gross decrease in unrecognized tax benefits related to prior period tax positions and a settlement. The net impact of these items resulted in a decrease to unrecognized tax benefits.
As of May 31, 2015, total gross unrecognized tax benefits, excluding related interest and penalties, were $438 million, $260 million of which would affect the Company's effective tax rate if recognized in future periods. The Company recognizes interest and penalties related to income tax matters in Income tax expense. The liability for payment of interest and penalties decreased $3 million during the year ended May 31, 2015, and increased $55 million and $4 million during the years ended May 31, 2014 and 2013, respectively. As of May 31, 2015 and 2014, accrued interest and penalties related to uncertain tax positions were $164 million and $167 million, respectively (excluding federal benefit). The Company incurs tax liabilities primarily in the United States, China and the Netherlands, as well as various state and other foreign jurisdictions. The Company is currently under audit by the U.S. Internal Revenue Service (IRS) for the 2012 through 2014 tax years. The Company has closed all U.S. federal income tax matters through fiscal 2011, with the exception of the validation of foreign tax credits utilized. As previously disclosed, the Company received a statutory notice of deficiency for fiscal 2011 proposing an increase in tax of $31 million, subject to interest, related to the foreign tax credit matter. This notice also reported a decrease in foreign tax credit carryovers for fiscal 2010 and 2011. The Company has contested this deficiency notice by filing a petition with the U.S Tax Court in April 2015. The Company does not expect the outcome of this matter to have a material impact on the financial statements. No payments on the assessment would be required until the dispute is definitively resolved. Based on the information currently available, the Company does not anticipate a significant increase or decrease to its unrecognized tax benefits for this matter within the next 12 months. The Company’s major foreign jurisdictions, China, the Netherlands and Brazil, have concluded substantially all income tax matters through calendar 2005, fiscal 2009 and calendar 2008, respectively. Although the timing of resolution of audits is not certain, the Company evaluates all domestic and foreign audit issues in the aggregate, along with the expiration of applicable statutes of limitations, and estimates that it is reasonably possible the total gross unrecognized tax benefits could decrease by up to $63 million within the next 12 months. The Company provides for U.S. income taxes on the undistributed earnings of foreign subsidiaries unless they are considered indefinitely reinvested outside the United States. At May 31, 2015, the indefinitely reinvested earnings in foreign subsidiaries upon which United States income taxes have not been provided were approximately $8.3 billion. If these undistributed earnings were repatriated to the United States, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, they would generate foreign tax credits that would reduce the federal tax liability associated with the foreign dividend or the otherwise taxable transaction. Assuming a full utilization of the foreign tax credits, the potential net deferred tax liability associated with these temporary differences of undistributed earnings would be approximately $2.7 billion at May 31, 2015. A portion of the Company's foreign operations are benefiting from a tax holiday, which is set to expire in 2021. This tax holiday may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The impact of this tax holiday decreased foreign taxes by $174 million, $138 million and $108 million for the fiscal years ended May 31, 2015, 2014 and 2013, respectively. The benefit of the tax holiday on diluted earnings per common share was $0.20, $0.15 and $0.12 for the fiscal years ended May 31, 2015, 2014 and 2013, respectively. Deferred tax assets at May 31, 2015 and 2014 were reduced by a valuation allowance relating to tax benefits of certain subsidiaries with operating losses. There was no net change in the valuation allowance for the year ended May 31, 2015 compared to a net increase of $4 million and a net decrease of $22 million for the years ended May 31, 2014 and 2013, respectively. The Company has available domestic and foreign loss carry-forwards of $36 million at May 31, 2015. Such losses will expire as follows:
|  | Year Ending May 31,
(In millions) |  | 2016 |  | 2017 |  | 2018 |  | 2019 |  | 2020-2035 |  | Indefinite |  |  | Total |
Net operating losses |  | $ | — |  |  | $ | — |  |  | $ | 4 |  |  | $ | 1 |  |  | $ | 17 |  |  | $ | 14 |  |  | $ | 36 |
During the years ended May 31, 2015, 2014 and 2013, income tax benefits attributable to employee stock-based compensation transactions of $224 million, $135 million and $76 million, respectively, were allocated to Total shareholders’ equity.

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